Transform Your Crypto Strategy: RSI Divergence for Maximum Profit

The Relative Strength Index is a momentum oscillator that measures the speed of changes in the price of an asset. It is designed to perform a calculation of the average gain and loss over a specific period.

Let’s breakdown the formula:

1. Average Gain: This calculation represents the average price increase over an exact period, typically 14 days, but fixable to the needs of traders.
2. Average Loss: Conversely to average gain, this calculation represents the average price decrease in the same period.
3. Relative Strength (RS): The Relative Strength derives from dividing the average loss by the average gain. An upward momentum results from a higher RS, and a lower RS indicates a downward momentum.

Those calculations then formulate values between 0 and 100 using the RS like this:

RSI = 100 – (100 / (1+ RS))

RSI Divergence: Advanced techniques

RSI allows the analysis of overbought and oversold conditions in the price of a crypto asset and can show divergences between the price action and the RSI line.

Exploring Divergence

For the bullish case, imagine a scenario where the price makes a lower low, but the RSI fails and instead does a higher low.

The situation here will indicate the downtrend is losing momentum and a price reversal to the upside is close to start.

Traders can proceed to the confirmation by looking for additional signals like bullish candlestick patterns or price rebounding off support levels.

For the bearish case, picture a market where the price makes a new high, but the RSI plunges and instead does a lower high.

The market here will indicate the uptrend momentum is weakening, and a price reversal to the downside is close to happening.

Traders can proceed to the confirmation by looking for additional signals like bearish candlestick patterns or price rejection over resistance levels.

Check out also: RSI Trading Strategy: RSI Calculation & Overbought and Oversold Levels!

Volume and RSI

Since volume indicates the number of orders flowing in the market, the combination of RSI with Volume can offer various applications. For example:

Search for Volume on an overbought level, increasing volume alongside an RSI over 70 suggests a substantial overbought condition, and the market might be ready for a price correction. You can also expect Volume on oversold levels, increasing volume alongside an RSI below 30 suggests a significant oversold condition, and the market might be ready for a price rebound.

Other forms of use could be:

• RSI with low volume: A notable movement in the RSI at the time volume is low could indicate that current price changes lack strength and might reverse. Also, if for some period the volume declines while the price is going up and the RSI climbs, it could be a signal potential divergence.
• RSI on breakouts with volume: When the price breaks through some support or resistance level accompanied by high volume, a signal of potential increased momentum in the direction of the breakout has emerged.

Source: How to Create a Trading Strategy Using RSI Divergence and Convergence – Altrady!

Divergence and different time frames

It is an advanced concept that makes use of different timeframe views. When the price makes a new high or low on a smaller timeframe, but the RSI does not confirm the high or low on a larger timeframe, this can signal a potential reversal compared to regular divergence.

Conclusion

The RSI allows essential techniques of divergence obtaining reliable signals. We explored how useful it can be combined with the Volume Indicator. In Altrady you can find more advanced tools to start trading live or on paper with the RSI.